China has warned of dangerous consequences in response to US Senate legislation that designates China a currency manipulator and provides for potential recourse to affected US industries. Washington accuses China of keeping its currency artificially low as part of mercantilist policy to gain trade advantage. Beijing claims US is trying to drive down value of US Dollar in part to also reduce its debt obligations – of which China holds a lion’s share. It has been going on for several years now. The most recent action by the US Senate is only the latest, and it has not been adopted by the whole Congress nor is it signed by President Obama to become law. However, the war of words is gradually escalating into a low simmer confrontation on several fronts beyond each other’s capitals. Is it though likely to escalate into something more akin to a full-blown trade war with nuclear consequences – that is in currency terms? Mutually Assured Destruction (MAD) as Currency/Trade War Deterrence: Actually Beijing and Washington have been operating on a kind of “mutually assured destruction” concept as applied to trade and currencies – each government steps closer to the brink with rhetoric and posturing but dares not launch the big trade war missiles. That does not mean that there are no skirmishes. Cases have been taken before the WTO (World Trade Organization). However, the WTO is a type of United Nations of trade and represents an orderly resolution of real and potential conflicts. Even in response to the recent US Senate resolution, China accuses the US of “violating the spirit of the WTO.” (Of course it could only be the “spirit” as the US has at least not yet adopted any laws or further regulations). Most of the current currency/trade war, in other words, is being fought rhetorically and still viewed in the context of the rules of WTO. The two countries each have more to lose than potentially win in a full out conflict. Both could lose markets and sources of product – China has more at risk on this front. The US could suffer a range of consequences if China decided to liquidate its holding of US Treasury securities. Even cutting back on holdings/further purchases could destabilize the US financial/economic system. Nonetheless, the risks are to both parties. Neither one can fire away an economic salvo without being affected at least by the fallout. Rise of Mercantilist China? Mutual deterrence only goes so far. Most economic experts do agree that China has kept its currency –“Yuan” – artificially low and for benefit of trade and dominating global production in certain industries. It may have started with textiles but is now moving into solar panels and computer chips. China has been successful in driving down costs of solar panel in a matter of only a couple of years to point that US/European producers are being driven out of business and an effective monopoly position may be on the horizon. Of course, there are benefits as well as negatives to US and other consumers seeking clean, renewable energy sources. For example – Hertz rental car is teaming up with a Chinese based producer to transform its rental offices and gradually cars to a form of hybrid use. China, having been the victim of European and US mercantilist policy a century earlier – (see Boxer and Opium “Wars” as an example) – has no qualms in applying a similar strategy even if tactics have evolved. It does see trade as a way to its goals of super-power equality even perhaps dominance – at least regionally to realize very fundamental objectives as Taiwan reunification and dispute with range of other states over petroleum rich deposits off Vietnam, Malaysia, Philippine etc coasts. Where is Confrontation waged? Especially in view of above ambitious regional political agenda, China is calculating a long-term gradualist approach and is likely to refrain from over-playing its hand. It does not mean though that Beijing will not apply the tactics of testing and bluffing. More directly, China is counting on its already sizable economic might to reshape regional and international alignments. The BRICS – (Brazil, Russia, India. China and South Africa) – is already being employed as a political/diplomatic alliance beyond its economic context. (READ – “China, Russia Veto UN Security Council Resolution” – diplomaticallyincorrect.org/films/blog_post/china-russia-veto-syria-un-security-council-resolution-by-ambassador-mo/35786 & Dalai Lama Victim of BRICS Solidarity?” - diplomaticallyincorrect.org/films/blog_post/dalai-lama-victim-of-brics-solidarity-by-ambassador-mo/35787 ). The unifying point of BRICS beyond mutual trade between largely resource producers and consumers is to counter the US in particularly arenas as the UN Security Council. This appears to be the dominant instinct for now even in capitals as New Delhi and Moscow that have their own economic and particularly political friction with Beijing. IMF as Battleground? Moscow as Beijing has come to characterize the Dollar’s role as primary global reserve currency as problematic. Kremlin accused the US of taking advantage of Dollars reserve currency status. Of course the US is, but that is neither new nor perhaps unexpected – it is a US resource as China and Russia have their own. China has been though ever more aggressively pushing for a new reserve currency, probably now to be joined by Russia and perhaps other BRICS. However, the Euro has its own problems for now. China nor Russia is not there on range of economic transparency considerations, and especially the Yuan is not a free floating currency but rather its exchange value is determined by Beijing. Thus China’s policy makers have been pressing for creation of special drawing rights by the IMF. READ – “Global Reserve Currency” (From May 20, 2011 – Below) China’s strategy goes beyond the person selected to an underlying agenda increasingly evident and advocated by Beijing. It wants less of Washington’s influence over the global financial system, and is seeking to reduce US Dollar status as the globe’s major reserve currency. However, rather than promote the Euro or its own currency as US Dollar alternatives, it has promoted the notion of a new Global Currency, and backed by the IMF, (“Special Drawing Rights - SDRs”). China may not be as agile, but in the end it will position its influence not in terms of a personality to be selected as IMF Chief but securing a favorable climate for its broader and even more important agenda on a new global reserve currency, perhaps in the form of SDRs. at diplomaticallyincorrect.org/films/blog_post/a-french-woman-or-an-asian-man-us-big-loser-by-ambassador/28143 Is Currency Skirmish Likely to Escalate into Full Blown Trade War? China sees this in terms of a longer time horizon, even if at times it appears uncharacteristically flustered by its inability to translate economic into political might or make substantial inroads in realizing a new global IMF currency or SDRs. China will need Europe beyond the BRICS to wage an effective campaign to end the US Dollar’s primacy status. China is also in just now showing signs of its own economy slowing – data just released evidenced slowing exports and trade surplus. This calls for Beijing and Washington to be cautious – mutual deterrence is not an assurance and especially in context of US election politics or even potential social/economic unrest in China if economy slows, (although China has shown itself nimble in face of financial crisis in 2008). Perhaps the best way to characterize the China/US currency confrontation increasingly similar in economic terms to the Soviet-US Cold War, sometimes waged through proxies as well as on a range of fronts and where rhetoric is a veneer for “MAD” or miscalculation – it is not in anyone’s interest to set-off a full fledged conflict, but it is a fine line to walk. By Ambassador Muhamed Sacirbey Facebook – Become a Fan at “Diplomatically Incorrect”

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